(Ignore income taxes in this problem.) Your Company has a telephone system that is in poor condition. The systemmust be either overhauled or replaced with a new system. The following data have been gathered concerning thesetwo alternatives:PresentSystemProposed New SystemPurchase cost when new$100,000$110,000Accumulated depreciation,90,000Overhaul cost needed now80,000Working capital required50,000Annual cash operating costs30,00020,000Salvage value now of old system10,000Salvage value in 8 years2,00015,000Your Company uses a 12% discount rate and the total cost approach to capital budgeting analysis. Both alternativesare expected to have a useful life of eight years. What is the net present value of the new system alternative? Enteryour answer without dollar signs. If the NPV is negative enter with a minus sign in front.

The NPV can be computed as follows:

Answered: ust be either overhauled or replaced…

Business

Finance

ust be either overhauled or replaced with a new syst ro alternatives:

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 28P: Friedman Company is considering installing a new IT system. The cost of the new system is estimated...

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Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
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(Ignore income taxes in this problem.) Your Company has a telephone system that is in poor condition. The system must be either overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: Present System Proposed New System Purchase cost when new $100,000 $110,000 Accumulated depreciation 90,000 Overhaul cost needed now 80,000 Working capital required 50,000 Annual cash operating costs 30,000 20,000 Salvage value now of old system 10,000 Salvage value in 8 years 2,000 15,000 Your Company uses a 12% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. What is the net present value of the new system alternative? Enter your answer without dollar signs. If the NPV is negative enter with a minus sign in front.
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